Fintree Juices Notes 2024

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Quantitative Methods
LM Name of Reading P.g.
1 Basics of Multiple Regression and Underlying Assumptions 1
2 Evaluating Regression Model Fit and Interpreting Model Results 2
3 Model Misspecification 5
4 Extensions of Multiple Regression 9
5 Time-Series Analysis 11
6 Machine Learning 17
7 Big Data Projects 26
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Financial Statement Analysis
1 Intercorporate Investments 1
2 Employee Compensation: Post Employment and Share-based 11
3 Multinational Operations 19
4 Analysis of Financial Institutions 24
5 Evaluating Quality of Financial Reports 30
6 Integration of Financial Statement Analysis Techniques 37
7 Financial Statement Modeling 40
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Employee Compensation: Post-Employment and Share-Based

FinTree Fruit 1 : Types of Employee Compensation
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1. Short-term benefits 2. Long-term benefits 3. Termination benefits
Compensation expected to be Compensation expected to be Compensation paid in the

paid within 12 months. paid after 12 months. event of employee termination.
E.g. E.g. E.g.
Salaries and wages, Annual bonuses, Long-term paid leave (e.g., sabbatical), Severance, Continued access to
Non-monetary benefits such as medical Long-term disability benefits medical and other non-monetary
care, Contributions to social security benefits, Career counseling and
schemes, Paid leave outplacement services
4. Share-based 5. Post-employment
compensation benefits
Compensation in the form of, Compensation expected to be

or in reference to, shares of the paid after employee retire-
employer’s stock. ment.
E.g. E.g.
Restricted stock, Stock options Pension and lump sum payments to
retirees, Retiree life insurance and
medical care
FinTree Fruit 2 : Compensation Timeline
Grant
Employer communicates terms of Vesting

compensation and employee accepts
them. Employee becomes entitled to Settlement
compensation, usually the same
time as services are provided.
Employer pays compensation to
employee.
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FinTree Fruit 3 : Types of Vesting condition
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Service Condition Performance Condition Market Condition
Vests based on the company's

Vests based on continued Requires meeting specific
share price meeting or exceed-
employment for a set period, performance targets like EPS
ing targets or outperforming
typically 3-5 years. or return on investment.
peers' share prices.
FinTree Fruit 4 : Instruments Used in Share-Based Compensation Plans
Instrument Also Known as Description
Restricted stock awards RSUs, Awards of shares or share-like units with sale
Restricted stock Performance shares or performance share and other restrictions that are lifted upon
units vesting.
Awards of non-tradeable call options, typically

Stock options Share options
at the money, on the employer’s stock.
Stock Stock appreciation rights Awards of cash or shares based on the

appreciation-based Phantom shares performance of shares over a period.
Employee stock purchase plan Permits employees to purchase a limited

Stock purchase-based
Employee stock ownership plan number of newly issued shares at a discount.
FinTree Fruit 5 : Share-Based Compensation Tax and Share Count Effects, Note Disclosures
Financial Reporting vs. Tax Treatment of Share-Based Compensation
Financial reporting: stock-based Tax return: deduction for stock-based

Instrument
compensation expense compensation
Timing Over the vesting period At settlement
Share price on the settlement date (RSUs),

Stock options Grant-date fair value
Intrinsic value at exercise (options)
Excess tax benefit / tax windfall

The amount by which the tax deduction associated with a share-based award exceeds the cumulative share-based compensation
expense recognized in accordance with US GAAP or IFRS. Excess tax benefits occur when the value of a share-based award at
settlement exceeds the value at the grant date.
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IFRS and US GAAP Treatment of Tax Windfalls and Shortfalls from Share-Based Compensation
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IFRS US GAAP
Gain recognized directly in stockholders’ Decrease in income tax expense on the income
equity. statement.
Share price on settlement

Loss recognized directly in stockholders’ Increase in income tax expense on the income
date < share price on grant
equity. statement.
date (tax shortfall)
Assumed proceeds from conversion or exercise of the share-based awards is the sum of two components
Cash proceeds from exercise Cash proceeds from exercise

(For options this is the strike price (For options this is the strike price
Assumed proceeds multiplied by the number of multiplied by the number of
options, but zero for RSUs) options, but zero for RSUs)
Treasury Stock Method Results
• In-the-money options: Dilutive if average share price > strike price.

• Out-of-the-money and at-the-money options: Anti-dilutive.
• RSUs: Usually dilutive, unless average stock price significantly falls below grant date price.
• Limitation on diluted EPS: Cannot exceed basic EPS; same for companies reporting a net loss.
FinTree Fruit 6 : Share-Based Compensation and Financial Statement Modeling
Forecasting Share-Based Compensation Expense

• Typically included in operating expenses, not a discrete line item.
• Forecast implicitly within operating expense or margin forecasts.
• Model as a percentage of revenues; historical average or industry benchmarks.
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Forecasting Shares Outstanding

• Begins with forecasts of grants and settlements of share-based awards.
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• Basic shares outstanding calculated by adding/removing shares based on exercises, issuances, and
repurchases.
• Diluted shares outstanding include potentially dilutive securities based on treasury stock method.
Valuation Considerations with Share-Based Compensation

• Share-based compensation is a transfer of value and dilutes existing shareholders.
• Not accounted for in default DCF models; adjustments required for dilution effects.
• Adjusted for in multiples-based valuations for transparency and consistency.
Free Cash Flow Measures and Share-Based Compensation

• Share-based compensation is non-cash and does not affect free cash flow.
• Caution needed in using free cash flow-based profitability and valuation measures for companies with
significant share-based compensation.
FinTree Fruit 7 : Financial Reporting for Post-Employment Benefits
• A closed DB plan means that new employees can no longer enter the plan
• A frozen DB plan means that current beneficiaries no longer accrue additional benefits from service, so
their future benefit payments are fixed.
• Both IFRS and US GAAP require a DB plan’s funded status to be reported on the balance sheet.
▫ Funded status = Fair value of plan assets – Pension obligation
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• Pension obligation = The present value, without deducting any plan assets, of expected future payments
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required to settle the obligation resulting from employee service in the current and prior periods.
▫ Funded status = Negative, the plan is an underfunded plan
▫ Funded status = Positive, the plan is an overfunded plan
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FinTree Fruit 8 : Differences in accounting treatment for pensions
FinTree Fruit 9 : Pension plan note disclosures and cash flow related information
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FinTree Fruit 10 : Valuation Considerations for DB Plans
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Valuations must account for two impacts related to DB plans including OPEB:
• The plan’s funded status, either a net liability of the company to plan beneficiaries or net asset if the
plan is overfunded
• Future service costs, which are future increases in the pension obligation from employee service.
This is applicable unless the company’s plans are frozen and not accruing additional benefits for
service.
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Introduction to Financial Statement Modeling

FinTree Fruit 1 :
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Equity
1 Equity Valuation: Applications and Processes 1
2 Discounted Dividend Valuation 4
3 Free Cash Flow Valuation 9
4 Market-Based Valuation: Price and Enterprise Value Multiples 12
5 Residual Income Valuation 18
6 Private Company Valuation 22
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Private Company Valuation

FinTree Fruit 1 : Public vs. Private Company Valuation
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FinTree Fruit 2 : Private Company Valuation Uses and Areas of Focus
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• Transaction-related valuations: Vital for ownership transfers and financing.
• Compliance-related valuations: Essential for legal and regulatory compliance.
• Litigation-related valuations: Conducted for legal proceedings.
• Specialized expertise: Required for each area; transaction-related valuations involve investment
bankers, compliance valuations demand accounting or tax knowledge, and litigation-related
valuations require legal skills.
• Different value definitions: Vary based on context; fair market value differs from investment
value.
• Areas of Focus:
▪ Earnings Normalization/Cash Flow
▪ Discount Rate Adjustments
▪ Valuation Discounts or Premiums
• Cash Flow and Earnings Adjustments: Necessary for estimating normalized earnings.
FinTree Fruit 3 : Earnings Normalization and Cash Flow Estimation
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• Challenges in Cash Flow Estimation
▪ Limited historical financial data availability
▪ Less stringent accounting standards
▪ Blending of personal and business expenses
• Types of Financial Statements

▪ Reviewed financial statements
▪ Compiled financial statements
▪ Audited financial statements
• Adjustments for Inconsistencies

▪ Normalize earnings for accurate forecasting
▪ Account for cyclicality, seasonality, one-time items, and non-economic anomalies
• Common Adjustments for Private Company Valuations

▪ Addressing goodwill impairment
▪ Distinguishing between one-time events and ongoing distortions
▪ Handling related-party transactions not at fair market value
• Considerations for Real Estate in Valuation

▪ Separate real estate from the operating company
▪ Include a market rental charge for using owned real estate in expenses
• Effect of Transactions Between Related Entities on Valuation

▪ Consider distortions and adjustments involving the transfer of value
• Additional Adjustments Applicable to Both Private and Public Companies

▪ Inventory accounting methods
▪ Depreciation assumptions
▪ Treatment of various costs
FinTree Fruit 4 : Factors Affecting Private Company Discount Rates
FinTree Fruit 5 : Required Rate of Return Models
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FinTree Fruit 6 : Valuation Discounts and Premiums
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FinTree Fruit 7 : Private Company Valuation Approaches
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Fixed Income
1 The Term Structure & Interest Rate Dynamics 1
2 The Arbitrage Free Valuation Framework 10
3 Valuation & Analysis of Bonds with Embedded Options 15
4 Credit Analysis Models 22
5 Credit Default Swaps 26
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Curve
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Derivatives
1 Pricing & Valuation of Forward Commitments 1
2 Valuation of Contingent Claims 8
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Economics
1 Currency Exchange Rates: Understanding Equilibrium Value 1
2 Economic Growth 8
3 Economics of Regulations 13
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TFP
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A selection effect
Whereby increased competition from foreign companies
forces less efficient domestic companies to exit and more efficient ones to
innovate and raises the efficiency of the overall national economy.
A scale effect
that allows producers to more fully exploit economies of scale
by selling to a larger market.
A backwardness effect
arising from less advanced countries or sectors of an
economy catching up with the more advanced countries or sectors through
knowledge spillovers
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Alternative Investments
1 Introduction to Commodities & Commodity Derivatives 1
2 Overview of Types of Real Estate Investment 6
3 Investments in Real Estate Through Publicly Traded Securities 9
4 Hedge Fund Strategies 15
Introduction to Commodities and Commodity Derivatives

FinTree Fruit 1 : Commodity Sectors
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FinTree Fruit 2 : Life Cycle of Commodities
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FinTree Fruit 3 : Valuation of Commodities
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FinTree Fruit 4 : Commodities Futures Markets: Participants
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FinTree Fruit 5 : Commodity Spot and Futures Pricing
FinTree Fruit 6 : Theories of Futures Returns
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FinTree Fruit 7 : Components of Futures Returns
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FinTree Fruit 8 : Contango, Backwardation, and the Roll Return
FinTree Fruit 9 : Commodity Swaps
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FinTree Fruit 10 : Commodity Indexes
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Overview of Types of Real Estate Investment

FinTree Fruit 1 : Basic Forms of Real Estate Investment
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FinTree Fruit 2 : Economic Value Drivers, Role in Portfolio, and Risk/Return of Real Estate Investments
Relative to Stocks and Bonds
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FinTree Fruit 3 : Considerations in Analysis and Due Diligence
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FinTree Fruit 4 : Indexes
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Investments in Real Estate through Publicly Traded Securities

FinTree Fruit 1 : Types of Publicly Traded Real Estate Securities
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FinTree Fruit 2 : Valuation approch
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FinTree Fruit 3 : Valuation: Net Asset Value Approach
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FinTree Fruit 4 : Valuation: Relative Value (Price Multiple) Approach
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FinTree Fruit 5 : Private vs. Public: A Comparison
Advantages
Private Real Estate Public Real Estate
• Direct exposure to real estate fundamentals • Access to professional management, liquidity, and
• Stable returns, low volatility diverse sectorsStable returns, low volatility
• Control, potential for illiquidity premium • Potential inflation hedge, strong alignment of inter-
ests
• Tax-efficient structure (REITs), low entry/exit costs
Disadvantages
Private Real Estate Public Real Estate
• Low liquidity, high fees • Low transparency, volatility influenced by leverage

• Difficulty exiting funds, lagging valuations • Equity market correlation, limited activities (REITs),
• Fewer regulations, potential mismanagement dividends taxed high
• Regulatory compliance costs, governance issues,
penalization for leverage
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FinTree Fruit 6 : Inputs to direct capitalization and DCF methods
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FinTree Fruit 7 : Ratios
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FinTree Fruit 8 : Investing in real estate through publicly traded securities
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Hedge Fund Strategies

FinTree Fruit 1 : Introduction and Classification of Hedge Fund Strategies
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FinTree Fruit 2 : Equity Strategies: Long/Short Equity
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FinTree Fruit 3 : Equity Strategies: Dedicated Short Selling and Short-Biased
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FinTree Fruit 4 : Equity Strategies: Equity Market Neutral
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FinTree Fruit 5 : Event-Driven Strategies
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FinTree Fruit 6 : Relative Value Strategies
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FinTree Fruit 7 : Opportunistic Strategies
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Global Macro Managed Futures
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FinTree Fruit 8 : Specialist Strategies
Specialist Strategies
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FinTree Fruit 9 : Specialist Strategies
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FinTree Fruit 10 : Analysis of Hedge Fund Strategies Using a Conditional Factor Risk Model
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FinTree Fruit 11 : Evaluating Equity Hedge Fund Strategies: Application
FinTree Fruit 12 : Evaluating Multi-Manager Hedge Fund Strategies: Application
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FinTree Fruit 13 : Portfolio Contribution of Hedge Fund Strategies
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Corporate Issuers
1 Analysis of Dividends and Share Repurchases 1
2 Environmental, Social, and Governance (ESG) Considerations in Investment Analysis 8
3 Cost of Capital: Advanced Topics 17
4 Corporate Restructuring 35
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Portfolio Management
1 Exchange-Traded Funds: Mechanics & Applications 1
2 Using Multifactor Models 6
3 Measuring & Managing Market Risk 9
4 Backtesting and Simulation 13
5 Economics and Investment Markets 15
6 Analysis of Active Portfolio Management 18
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Ethics
1 Code of Ethics and Standards of Professional Conduct 1
2 Guidance for Standards I-VII 3
3 Required Vs Recommended 23
4 Application of the Code and Standards: Level II (Refer to curriculum) -
Ethics and Trust in the Investment Profession

FinTree Fruit 1 : Introduction
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FinTree Fruit 2 : Ethics, Society, and the Capital Markets
FinTree Fruit 3 : Sustainability & relationship
FinTree Fruit 4 : Ethical Decision-Making Frameworks
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Code of Ethics
FinTree Fruit 1 : Introduction
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Guidance for Standards I–VII

FinTree Fruit 1 : Standard I
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FinTree Fruit 2 : Standard II
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FinTree Fruit 3 : Standard III
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FinTree Fruit 4 : Standard IV
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FinTree Fruit 5 : Standard V
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FinTree Fruit 6 : Standard VI
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FinTree Fruit 7 : Standard VII
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Required Vs Recommended
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Employee Compensation: Post-Employment and Share-Based

Compensation expected to be Compensation expected to be Compensation paid in the

care, Contributions to social security benefits, Career counseling and

schemes, Paid leave outplacement services

Compensation in the form of, Compensation expected to be

retirees, Retiree life insurance and

FinTree Fruit 2 : Compensation Timeline

Employer communicates terms of Vesting

FinTree Fruit 3 : Types of Vesting condition

Vests based on the company's

FinTree Fruit 4 : Instruments Used in Share-Based Compensation Plans

Instrument Also Known as Description

Awards of non-tradeable call options, typically

Stock Stock appreciation rights Awards of cash or shares based on the

Employee stock purchase plan Permits employees to purchase a limited

Financial Reporting vs. Tax Treatment of Share-Based Compensation

Financial reporting: stock-based Tax return: deduction for stock-based

Timing Over the vesting period At settlement

Share price on the settlement date (RSUs),

Excess tax benefit / tax windfall

Share price on settlement

Cash proceeds from exercise Cash proceeds from exercise

Treasury Stock Method Results

• In-the-money options: Dilutive if average share price > strike price.

FinTree Fruit 6 : Share-Based Compensation and Financial Statement Modeling

Forecasting Share-Based Compensation Expense

Forecasting Shares Outstanding

Valuation Considerations with Share-Based Compensation

Free Cash Flow Measures and Share-Based Compensation

FinTree Fruit 7 : Financial Reporting for Post-Employment Benefits

FinTree Fruit 10 : Valuation Considerations for DB Plans

Introduction to Financial Statement Modeling

Private Company Valuation

FinTree Fruit 2 : Private Company Valuation Uses and Areas of Focus

FinTree Fruit 3 : Earnings Normalization and Cash Flow Estimation

• Types of Financial Statements

• Adjustments for Inconsistencies

• Common Adjustments for Private Company Valuations

• Considerations for Real Estate in Valuation

• Effect of Transactions Between Related Entities on Valuation

• Additional Adjustments Applicable to Both Private and Public Companies

FinTree Fruit 4 : Factors Affecting Private Company Discount Rates

FinTree Fruit 5 : Required Rate of Return Models

FinTree Fruit 6 : Valuation Discounts and Premiums

Introduction to Commodities and Commodity Derivatives

FinTree Fruit 2 : Life Cycle of Commodities

FinTree Fruit 3 : Valuation of Commodities

FinTree Fruit 4 : Commodities Futures Markets: Participants

FinTree Fruit 5 : Commodity Spot and Futures Pricing

FinTree Fruit 6 : Theories of Futures Returns

FinTree Fruit 7 : Components of Futures Returns

FinTree Fruit 9 : Commodity Swaps

FinTree Fruit 10 : Commodity Indexes

Overview of Types of Real Estate Investment

FinTree Fruit 3 : Considerations in Analysis and Due Diligence

FinTree Fruit 4 : Indexes

Investments in Real Estate through Publicly Traded Securities

FinTree Fruit 2 : Valuation approch

FinTree Fruit 4 : Valuation: Relative Value (Price Multiple) Approach